China’s efforts to jump-start an economic revival are floundering under the weight of local-government debts and slumping land sales, putting pressure on policy makers to unleash fresh stimulus measures.

With last week’s yuan devaluation roiling international markets and growth in domestic tax receipts slowing, Premier Li Keqiang will need to reach deeper into his toolkit to assure his 2015 economic-expansion target of around 7 percent.

Local governments alone face a debt-service burden of about 1 trillion yuan this year ($156 billion), according to JPMorgan Chase & Co. Revenue from land sales in the first seven months plunged 954 billion yuan from a year earlier, according to the government. Growth in fiscal revenue was 5.4 percent in the first seven months compared with 8.5 percent a year earlier using the same methodology, highlighting pressure on receipts.

“Local governments are facing a double whammy of interest payments up, and land revenues down,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group Inc. in Los Angeles. The fiscal drag, along with a continuing slowdown in credit expansion, “was one reason they let the exchange rate weaken,” he said.

The economy will need an additional 300 billion yuan to 400 billion yuan pumped in through government-run development banks, or other channels, to ensure the 2015 growth target, said Zhu Haibin, chief China economist at JPMorgan in Hong Kong.

David Fuller's view

Everyone has a view on China but it is not an easy market to analyse.  This is partly because no one has ever seen anything like China before.  It is a huge country with the world’s largest population, which has grown at an unprecedented rate over the last 35 years, largely due to its variation on capitalism.  This is of the command variety which can appear wonderfully efficient or amateurishly incompetent.  We have had a dose of the latter over the last few months. 

China is also modernising its growth model as it becomes less of an emerging market and more of a developed economy.  This is good news for the long term but hugely disruptive in the short term, not least for commodity exporters.  China’s policy decisions increasingly have a global influence and this will not change. 

Today, China has a credibility problem which is weighing on sentiment domestically and also internationally.  The short-term bad news is that this is dragging most stock markets lower.  The medium-term good news is lower valuations are creating another buying opportunity. 

Meanwhile, everyone is feeling the pressure, not least China’s government.  Fortunately, China can afford to pump in an additional 300bn to 400bn yuan, as is mentioned in the last paragraph of the Bloomberg article shown above.  The sooner that happens, the better it will be for global stock markets.